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American Depositary Receipts

Introduction

Globalization is the dissolution of barriers to trade and the tendency of the world's

businesses to integrate customs and values. Globalization is making it increasingly easy to

travel, correspond and even invest in other countries.

Investing money in your own country's stock market is relatively simple. You call your

broker or login to your online account and place a buy or sell order. Investing in a company

that is listed on a foreign exchange is much more difficult. ould you even know where to

start! "oes your broker provide services in other countries! #or example, imagine the

commission and foreign exchange costs on an investment in $ussia or Indonesia.

%owever, now there is an easy way around this through &merican depositary receipts

&"$s(. )ore than *,+++ foreign companies provide this option for .-. and anadian

investors interested in buying shares. In this tutorial, we'll explain how this investment

vehicle works and help you sort out whether it could be a good choice for your portfolio.

What Is An ADR?

Introduced to the financial markets in /0*1, an &merican depositary receipt &"$( is a

stock that trades in the nited -tates but represents a specified number of shares in a

foreign corporation. &"$s are bought and sold on &merican markets 2ust like regular

stocks, and are issued3sponsored in the .-. by a bank or brokerage.

&"$s were introduced as a result of the complexities involved in buying shares in foreign

countries and the difficulties associated with trading at different prices and currency values.#or this reason, .-. banks simply purchase a bulk lot of shares from the company, bundle

the shares into groups, and reissues them on either the 4ew York -tock 5xchange4Y-5(,

&merican -tock 5xchange&)56( or the4asda7. In return, the foreign company must

provide detailed financial information to the sponsor bank. 8he depositary bank sets the

ratio of .-. &"$s per home9country share. 8his ratio can be anything less than or greater

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than /. 8his is done because the banks wish to price an &"$ high enough to show

substantial value, yet low enough to make it affordable for individual investors. )ost

investors try to avoid investing in penny stocks, and many would shy away from a

company trading for :+ $ussian roubles per share, which e7uates to -;/.:+ per share. &s

a result, the ma2ority of &"$s range between ;/+ and ;/++ per share. If, in the home

country, the shares were worth considerably less, then each &"$ would represent several

real shares.

8here are three different types of &"$ issues. =evels / and * are

listings in the .-., while =evel > &"$s are public offerings to investors.

$emember that there are other risks associated with buying &"$s, including

inflationary risk,political risk and exchange rate risk.

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